Clean Air Helps the Economy

Environmental regulation doesn't kill jobs; it creates them.

In December, the Obama administration approved long-overdue environmental regulations requiring U.S. power plants to reduce emissions of mercury, arsenic, and other toxic metals. The Mercury and Air Toxics Standards, or air toxics rule, is expected to prevent up to 11,000 premature deaths a year and have many other health benefits. And yet conservative members of Congress oppose it.

Why? Because they say it will "kill jobs." This is a familiar tactic for politicians opposed to any sort of regulation. Conservatives have been scarily disciplined in appending the job-killing label to all regulations, both old and new.

As somebody who has been on the front line of this particular battle, I'm afraid to say that the tactic seems to have resonance. Of course, it has also been a disaster for those interested in a true assessment of regulation's impacts on the economy.

Advertisement

The rationale for attaching the job-killing label to nearly all mentions of regulation is pretty clear: Even 32 months after the official end of the recession, the U.S. continues to have a joblessness crisis. While the overall unemployment rate has fallen from its 10 percent peak in October 2009 to 8.3 percent last month, the large majority of this decline was explained not by increased job creation, but by a drop in people classifying themselves as actively looking for work.

Conservatives are, in short, hoping to convert the public's justifiable concern about joblessness into support for their decades-long battle against robust environmental, labor, and financial regulations.

Voters who might normally be skeptical of efforts to halt regulations that would protect them from mercury and arsenic spewed into the atmosphere could be more receptive to arguments that they should be postponed so as not to threaten an already fragile economic recovery.

These arguments are how I entered this debate. I'm not a regulatory expert, but I am a macroeconomist and thus know what does and does not impact overall job growth. Textbook macroeconomics indicates that, from the perspective of job creation, the best time to enact regulations that may require costly investments is precisely when the economy is depressed.

The reasoning is fairly straightforward. When the economy is functioning well, the impact of new environmental regulation on job growth is roughly neutral, for two reasons. First, the direct effects of regulatory changes generally cut in opposing directions. Take the economic impact of the air toxics rule. The rule requires investment in equipment to abate and control pollution, which will directly create jobs—people must be hired to manufacture and install the scrubbers, filters, and baghouses that will reduce toxic emissions. But this extra investment adds to the cost of producing energy. These costs are passed on to energy-using industries, which pass them on to consumers in the form of higher prices. That reduces demand for goods and services, and so destroys jobs.

Generally, these direct influences cancel each other out. Even if they don't, the second reason for regulation's neutral effect on jobs comes into play: the central bank. In an effort to hit its overall inflation and unemployment targets, a nation's central bank—in the U.S., the Federal Reserve—will simply sterilize any change in job growth stemming from regulatory changes by adjusting interest rates to spur or slow economic activity.

So when the economy is behaving well, environmental regulatory changes are generally irrelevant to job growth. But when the economy is not functioning well, regulatory changes are very likely to create jobs.

There are three reasons for this. First, investments in pollution abatement and control do not threaten to crowd out other investments by monopolizing scarce financial capital and hence pushing up interest rates. Financial capital is not scarce during recessions, but opportunities to undertake real investment projects are.

Second, increases in energy costs following the implementation of new rules are unlikely to be passed on to consumers. With lots of excess supply around, firms are not in the position to raise the price of their goods without worrying about the effects on demand. Further, profit margins in the U.S. corporate sector are at a 45-year high, meaning that increased costs can easily be absorbed by companies through reduced profits. Empirical research shows that high profit margins do indeed provide such buffers against price increases.

Lastly, the boost to employment provided by new investments accompanied by muted price responses will not be neutralized by the Federal Reserve, at least not in the next few years, as it has committed to holding interest rates low until unemployment returns to more normal levels.

In the specific case of the air toxics rule, my research indicates that the net impact of the regulations will be to add about 100,000 jobs to the U.S. economy by the end of 2015.

I should be clear: This would not make a large dent in the unemployment figures. But the toxics rule isn't meant to be a job creation program—it is meant to provide improvements to health and quality of life. And in this primary purpose the research is undeniable that it will hit its target. Holding up its enactment based on fear-mongering about jobs is exactly wrong. In fact, pushing forward with it while the economy is depressed would add a modest knock-on benefit of job growth to the much larger benefits it will provide to health and quality of life.